Not every small business needs the outside help (and influence) of angel investors and venture capitalists to get going. Crazy as it seems, there are ways to fund a business venture yourself with the creative use of resources.
Back in the old America (pre-2007), a new business owner who wanted to expedite the process of getting business funding or business credit would establish his or her business as a for-profit corporation. The business structure of a corporation is a bit more complex than that of a Limited Liability Company, partnership or sole proprietorship.
Creditors ow that as a sign of commitment and were more willing to extend business credit to corporations than LLCs and other types of business entity formations. A prevalent misconception then was that business credit is for the business and therefore tied to the business. Not so and many folks learned that lesson the hard way during the economic shift a few years ago. Business credit card debt was then and is now the responsibility of the account’s personal guarantor, usually the business owner.
In a post-2007, business credit is a far more difficult to come by. And when the personal credit laws changed in 2008, it actually made using personal credit cards in business more appealing. Please understand. Ni business owners should be downright anal about keeping accurate, organized physical records and digital books. But as most micro-business owners fund their startups by making equity deposits into the business the idea of using personal money to fund a business is not an uncommon one.
First and foremost, a line was drawn in the sand about the rules by which creditors must handle personal credit accounts versus business credit accounts creditors had to make adjustments to the way they treated late payments, adjustable Interest rates and blanket defaults on personal credit accounts only. Creditors could no longer inflate Interest rates seemingly at a whim on personal credit accounts Consumers had rights again and fewer sudden changes and hidden costs with which to contend. The end result was that savvy micro-business owners began using their personal credit cards to fund new ventures.
Why? Because historically, business credit was extended as long as the consumer assumed personal responsibility for the debt If their company went under or defaulted on the loan. Business owners served as personal guarantors, so their business entity formation may have protected them from slip and fall grits or double taxation, their personal credit still took the hit If something went awry with the business such as slow pay on leased equipment or store credit cards. If you are going to assume personal liability for a debt anyway, it makes sense to use your personal credit card to cover the costs of expenses that wouldn’t (or couldn’t) be paid back immediately. To avoid paying inflated interest rates on business credit cards, which are generally a minimum of higher than the interest rates on personal credit cards, owners are using personal credit to cover high-priced expenses that will be repaid over a longer period of time, and business credit to cover the cost of things that can be paid back within the current billing cycle. It’s a sweeter deal all around.
Most business owners have at least one credit card and if they don’t, a personal credit account will be easier to obtain than a business credit account. Business creditors do look at the credit worthiness of the personal guarantor as well as the performance and stability of the business itself. For upstarts, particularly in this credit market, creditors have loosened their ties a little bit on this since the end of 2010, but honestly, it’s not like it was in old America.
At this time in the financial history of this country, you’re far more likely to get a personal credit card with which you can underwrite the cost of launching a new business rather than a business credit line. The average low-interest personal credit card caries an annual percentage rate of just over 70% compared to more than 13% for business credit cards. And when you’re just starling out and bent on bringing in the sales, it can be a bit easier to obtain and subsequently manage a personal credit account over a corporate one.
No micro-business which has yet to prove itself In the market Is better off by starting out with a great deal of debt to carry and repay. Yes, using your personal credit to fund your business will affect your debt to income ratio, but so does having an active business credit card account with an existing balance that is accruing interest at a higher rate. For micro businesses without the means to pay back purchases in full every single month, leveraging the purchasing power and solid payment history of a person credit card can be quite beneficial and a smart way to use precious financial resources.
Business loans are expensive and they require collateral. Like business credit, business loans take into account both the performance and stability of your business as well as your personal credit worthiness. If you have assets other than your primary residence, It may be a better choice for you to sell your assets and use the proceeds to finance your business free and dear rather than to keep the asset, use it as collateral and assume more debt for yourself and your business than necessary. Besides, if you structure your business correctly and are able to draw paying customers into your business, you can always get a loan later to help expand your endeavor.
Often, startups turn to venture capital Investment as a choice of funding their expanding business operations. The reasons are numerous Not only do venture capital firms have very deep pockets, they also have access to a wide range of experts, consultants, and contacts. With the advantages a VC firm brings to the table, a startup can quickly grow and compete with Its larger rivals Although venture capital funding has helped many startups grow Into major corporations, there are some entrepreneurs that believe it comes at too high a price.
Who Qualifies?
VC thins provide funding to startups coning of age, ready to take the next step in their corporate evolution. The capital they Inject into these small enterprises can be used for anything from business expansion to aggressive marketing campaigns. Not every new business venture Is considered for this kind of funding, however. As a matter of fact, very few startups have the qualifies VC firm are looking for. Traditionally, the companies that draw the most attention are small, high-growth organizations that are still at a very early stage of development. These young companies are usually seen as high-return opportunities by the venture capitalists.
How it Works
When a VC firm agrees to back a startup, the funds and expertise they make available to the young company comes with many strings attached. First and foremost, the venture capitalists will want majority interest. They need to have fill control over the startup for several reasons we shall soon explore. Curing Initial negotiations, if an equitable balance is not achieved, the founders of the startup may eventually find themselves as employees rather than top decision makers.
While a business can start with minimal capital in some instances, the need for funding is unavoidable. Whether there is a need for funding the initial roll-out process, product development, the acquisition of inventory, or initial payroll costs, there will be a need for funding early in the process. Yes, a business begins as an idea or concept; however, the process of converting that idea into a physical reality will require capital.
It is important to understand that capital comes In multitudinous forms and currency is only one form; however, it is the most fluid. There will be times in which you will be able to use your mind, which Is the most valuable capital you have. When you can think laterally, i.e., outside of the box of traditional thought, you will be able to create solutions that will allow you to circumvent the need for cash. However, the ability to generate the cash flow that will fund your business needs will help fortify your position In the market and increase the chance for the longevity of your business.
It has become increasingly difficult for aspiring business owners to get the funding they need through traditional channels, and with a pending crash or crisis looming over the financial market itself — the market Is long overdue fora downswing — the need for creative financing has gained substantial relevance over the last three to five years. Following are some creative forms of business funding that you should consider when considering alternative financing for your business.
Personal Financing
Personal financing may not appear to be a creative form of funding your business, but it is one that Is necessary. Anyone who is considering starting a business should be saving capital whenever possible to place themselves in the best possible financial position when the time comes. You will be hard-pressed to find a venture capitalist or any investor willing to back your business plan when you do not have skin in the game. That means that you will need to get your business tip and running to the point of profitability appealing to external funding sources. Otherwise, you will need cash on hand to show you’ve Invested in your aspirations.
Personal Lines of Credit
It is possible for you to qualify for a secured personal secured line of credit based on your current creditworthiness. Many lending institutions will extend this line without a business plan, and it is possible to receive as much as $250,000 or even more depending on your current income-to-debt ratio. It Is also possible to acquire credit cards with less history than required for a line of credit.
Small and growing businesses depend on attracting and retaining quality personnel, but the cost of standard employee “perks” such as health insurance, fitness club memberships or a pension, may be out of reach for smaller enterprises. Does this mean that small businesses have to settle for that employee whose primary qualification is breathing? Not necessarily.
People judge two things as almost equivalent — money and time. Small businesses have the elasticity to offer new hires flextime, job sharing or an alternate schedule that many large corporations can’t. Time perks don’t increase overhead expenses and can create a winning situation for employer and employee alike. Flex time can help startups build a great team of motivated employees and may help retain valuable human resources when other, more highly capitalized companies come a-courting.
Men and women today are seeking a way to balance work and life, and flextime or job sharing allows employees to schedule around family or personal priorities without sacrificing job time. single parents especially appreciate this kind of scheduling, as it allows them to work full or dose-to-full time and then be home when their children return from school.
Scheduling that allows parents more time in which to Interact with their children helps maintain strong family ties which studies have shown over the long run results in an employee with a better attitude who is more productive. It may also help cut down on child-related absences many of which are a child’s way of dealing with abandonment issues.
Improving Startup Productivity
If you were to loiter in the business section of any 2nd hand bookstore you would find an overabundance of last year’s bestsellers on how to improve productivity in the workforce. Printed on each book jacket are audacious claims like, “A business paradigm shift equivalent to an 8.o magnitude earthquake”. Each year businesses sink unhealthy doses of their previous year’s earnings investing in the latest bestseller and subsequent bestseller seminars. But how effective or innovative are
these productivity improvement programs? If you were to extract the “spin” from each of them, would they all end tip looking, feeling, and smelling the time? I have been working in the business community for over 25 years. In that time, I have been on the receiving end of dozens of these improvement program.
After the first few, I became cynical. After the second few, I became numb. Based on my experience, there are only a few key steps to improving productivity. These fundamental steps are the same whether you work for a Fortune 500 company out of someone’s garage. They are the same factors regardless of the product or service you provide.
But before we go any further, you will need to determine whether you want to Improve productivity or increase productivity. Improving productivity means there is improvement margin within your maximum capability. In other words, based on your facility, equipment, and staffing constraints, your maximum capability may be 100 units per month. If you’re only putting out go a month, you need to Improve productivity. If you want to tip your yield to no per month, then you want to increase productivity. Increasing productivity usually requires a detailed business case, as it generally requires some level of capital investment.
As you will see, there is a natural progression from one step to the next. An effective training program is to document the processes required to build a product or deliver a service. This is similar to a recipe. It documents the start-to-finish steps required to build a product, while driving consistency into the process as well. If you do not document your processes, don’t bother going any further.
The second step of an effective training program is to make sure the right tools are in place to support each process Taking the recipe analogy one step further, if you need to add two cups of flour, you need to make sure there is a measuring cup available. If not, each person will have to guess as to how much flour to add. If you don’t provide the necessary toils, people will improvise (a recipe for disaster).